Binary option is a type of option in which the payoff is structured to be either a fixed amount of compensation if the option expires in the money or nothing at all if the option expires out of the money. These types of options are different from plain vanilla options. These are also sometimes referred to as “all-or-nothing options” or “digital options”. For example, suppose you were interested in buying binary call options for common shares of ABC company with a strike price of $50 per share and a specified binary payoff of $500. If the stock is trading above $50 when the expiration date is reached, you would receive the $500 payoff for your option contract. However, if the stock is trading below $50 per share at the expiration date, you receive nothing. Hence it is called a binary option.
Options trading mean trading options that are offered on stocks (or any other assets) instead of the stocks themselves. You do not need to own the underlying stock for options trading. There are 2 classes of options, CALL OPTIONs and PUT OPTIONs. Creative use of both classes leads to an almost unlimited combination of possible option strategies. Options trading strategies are capable of performing wonders such as profiting from BOTH an up or down move, or profiting even when the underlying stock stays stagnant!
The first thing you need in order to start trading binary options is a broker that works with this type of instruments. Unlike traditional options, binary options are not carried by traditional brokers such as Etrade or any of the ones you are used to hearing from. Trading binary options are usually carried by specialized brokers that only offer these instruments and depending on the broker you will get more assets to trade options on and more expiration terms.
Once you have a trading platform where you can place you trades, you must then choose an underlying asset on which you will be trading your options. Indeed, there are many assets you can trade binary options on, and the list of the ones available is growing everyday. For example, you will find that you can trade binary options on currency, stocks, commodities and even indices, but which one will you be buying options on will depend on the level of familiarity you have with each market.
Binary options trading are usually done by the hour, meaning that they expire hourly, however, there are longer term expiration such as daily and even monthly. Choosing the proper time of expiration for your trade will depend on your strategy and how you approach the analysis of the market. If you are comfortable with the analysis of 5 or 15 minutes charts, then you can trade on short term options. On the other hand, if you feel more comfortable analyzing longer term charts then you should go for binary options trading with expiry time by the end of the day. Once you have your analysis in place and a good idea of where the market is headed within the time of expiration you chose, then it is time to open position with a PUT (if you think it is going down) or a CALL (if your think it is going up).